Updated on: Friday, October 29, 2021, 04:36 PM IST

Teji Mandi Explains: RBI v/s HNIs, on IPO financing

Teji Mandi Explains: RBI v/s HNIs, on IPO financing | Photo Credit: PTI

Teji Mandi Explains: RBI v/s HNIs, on IPO financing | Photo Credit: PTI


The IPO pipeline is buzzing hot right now. Ever since Nykaa announced its issue dates, the market has gone crazy waiting to grab hands on anything that’s left on the table. Witnessing this madness, the RBI has decided to cap the excitement of high net worth individuals (HNIs), who have been using leverage to generate unprecedented gains.

Why Target HNIs?

Let’s first understand what’s leverage. Wealthy investors approach banks to borrow lots of money weeks before an IPO. The lender, i.e. the NBFC/bank, dispatches the money by asking for a deposit upfront, which is called margin. Based on this margin amount, the investor usually borrows 50 times or more the value of the margin amount. This money is then used to subscribe to the IPO. The returns that the HNIs get post-listing are huge, with that money, then they pay the lenders and pocket the difference. HNIs make crores in a few weeks, while retail investors are kept waiting for the share allotment, and most of them don’t even get it.

RBI’s DikTat

RBI is smart and has noticed the discrepancy of gains received by retail investors and HNIs. Therefore, it has limited IPO financing by NBFCs to Rs 1 crore per borrower. This has soured the sentiments of wealthy investors because now they can’t get as much money as they were getting earlier. NBFCs were lending hundreds of crores to the borrowers but not anymore. This new guideline would come into effect from April 1, 2022.

Is That Why The Market Is Bleeding?

The RBI’s announcement on limiting the IPO financing came in last week, and the Nifty50 index is down by about 5% since then. Surely, this news has soured wealthy investors’ mood, but the crazy IPO pipeline is also one of the reasons behind the market meltdown. The big-ticket IPOs like Nykaa and Paytm will raise nearly Rs 24,000 crore and this will indeed drain away some liquidity. However, that’s one to look at, there are several other reasons to factor in too, like weak global markets, mixed quarterly earnings, new COVID-19 variant, overpriced stocks etc.

Outcome Of This New Guideline?

The RBI knows that the stock market is a high risk game. HNIs prediction of a premium opening cannot be true every time. If the stock slips on its listing day, the HNIs still have to pay the amount back to the bank/NBFC. If they default and run away, then the banks are at very high risk. Meanwhile, this limit on IPO financing will create room for other investors to make money too. Why should HNIs have all the fun?

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Published on: Friday, October 29, 2021, 04:36 PM IST